Canada: Alberta Court Of Appeal Confirms That Directors Can Be At Arm's Length With Their Companies

Last Updated: October 16 2013
Article by Justin R. Seitz

There are several factors one must consider when determining if payments made are fraudulent preferences under section 95 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the "BIA"). Fortunately the Alberta Court of Appeal has recently handed down a decision that may be of interest to bankruptcy practitioners. In Piikani Energy Corporation (Re), 2013 ABCA 293, the Court of Appeal had to determine if certain payments made by an energy corporation were fraudulent preferences, and in coming to its conclusion the Court touched on the issue of arm's length transactions with directors.


The Piikani Nation (the "Nation"), located in the south-west corner of Alberta, agreed to allow a portion of its lands to be used for the development of the Oldman River Dam. The Piikani Nation received $36.3M in return for entering into the Settlement Agreement. This money was going to flow to other Piikani Business Entities, such as Piikani Energy Corporation (PEC).

On January 1, 2009, PEC entered into a consulting agreement with 607385 Alberta Ltd ("607") pursuant to which 607 would receive an annual fee of $150,000 payable in advance. 607's consulting business is run by Stephanie Ho Lem.

On February 1, 2009, Dale McMullen entered into an employment agreement with PEC.

There were ongoing legal battles between the Nation, PEC and Piikani Investment Corporation (PIC). In October 2009 the Nation applied for the appointment of Alger & Associates Inc. ("Alger") as investigator for PIC. On December 18, 2009, PEC paid 607 its annual retainer for 2010, as well as McMullen's severance payment pursuant to the employment agreement. Three days later the Nation's application to have Alger named as PEC's Interim Conservator was granted by a chambers judge. Alger terminated 607's consulting agreement in July of 2010, and demanded that Ho Lem pay back her unearned portion of 607's 2010 retainer. On November 20, 2012, Alger assigned PEC into bankruptcy.

Alger was successful in its application to have the payments made to 607 and McMullen voided as fraudulent preferences. The chambers judge held that PEC was insolvent when it made the payments to Ho Lem and McMullen, and that they were not at arm's length to PEC. 607 and McMullen appealed.

Issues and Reasoning

At issue on appeal was whether Ho Lem and McMullen were at arm's length to PEC, and whether PEC was insolvent when the payments were made. The term "arm's length" is not defined in the BIA.

Section 95 of the BIA was the relevant section in this matter. This section creates the distinction of arm's length and non-arm's length creditors; this is significant for two reasons: for one, if a transaction occurs between two arm's length parties then the reviewable period before bankruptcy is three months, whereas if the transaction occurs between non-arm's length parties the reviewable period is twelve months. This meant that if Ho Lem and McMullen were found to be at arm's length to PEC then the payments are not reviewable (because they occurred more than three months prior to bankruptcy). Secondly, the current wording of section 95 came into force in September of 2009, and it eliminated the question of intent for preferences between non-arm's length parties.

The chambers judge concluded that directors generally are not at arm's length with the corporations they serve, and therefore Ho Lem and McMullen were not at arm's length with PEC (they were both, at various times, directors and officers of PEC and PIC). The Court of Appeal found that the chambers judge erred in several ways when coming to his conclusion.

For one, the chambers judge refused to look at any decision discussing the meaning of arm's length transactions in the context of the Income Tax Act, RSC 1985, c 1 (5th Supp) (the "ITA"). Instead the chambers judge concluded that the definition of "arm's length" for the purposes of the BIA was more closely related to the concept of insiders under the Securities Act, RSA 2000, c S-4. The Court of Appeal disagreed stating that the "concept of 'insider' is qualitatively different from the concept of an 'arm's length' person" (at para 20). Instead the Court of Appeal concluded that the ITA does provide appropriate principles for determining whether parties are dealing at arm's length.

The Court of Appeal looked at the historical usage of the terms "control" and "arm's length" in legislation, concluding that Parliament must have intended that those terms have the same meaning in the BIA as in the ITA given that they have almost identical wording. Furthermore, key cases that contemplated the definition of "arm's length" in the context of the BIA used the ITA for guidance. The Court of Appeal found that "defining arm's length consistently [...] accords with the view that courts may consider the legislature's 'statute book' in giving meaning to a term. This approach relies on the logical presumption that Parliament knows what other statutes say when it passes an enactment" (at para. 26). The Court of Appeal endorsed Rothstein J's approach in McClarty v R, 2008 SCC 26 (McClarty), where it was held that "a court must consider all the relevant circumstances to determine if the parties in a transaction are at arm's length" and pointed to three useful criteria for making that determination (at para. 29):

i. was there a common mind which directs the bargaining for both parties to a transaction;

ii. were the parties to a transaction acting in concern without separate interest; and

iii. was there de facto control.

Finally, the chambers judge found it difficult to see how it was possible that "decisions-makers could be at arm's length to the [a] corporation when they make payment decisions, especially to themselves" (Piikani Energy Corporation (Re), 2012 ABQB 187 (CanLII), at para. 129). In response the Court of Appeal cited several decisions which support the position that being a director of a company does not necessarily mean that one is not at arm's length with the company (at paras. 31-34). Again, similar to the three criteria mentioned in McClarty (above), it depends on the degree of control or influence and whether interests are aligned. Furthermore the Court of Appeal pointed to the Business Corporations Act, RSA 2000, c B-9 (the "BCA"), which recognizes that it is not always the case that a director is not at arm's length with the corporation they serve (referring to section 102(6) of the BCA). "So long as the corporation is represented by independent individuals, the director would be dealing at arm's length [...]" (para. 35).

The Court of Appeal concluded, on the facts, that Ho Lem and McMullen were at arm's length to PEC, and therefore the payments were not reviewable pursuant to section 95 of the BIA (because the payments occurred outside the three-month period). In addition to the error's regarding the law with respect to the arm's length determination, the chamber's judge also incorrectly believed that Ho Lem and McMullen constituted 50% of the Board of PEC when in fact they were two of five directors (therefore had less than 50% control). Since both Ho Lem and McMullen were found to have dealt with PEC at arm's length, it was not necessary to consider whether PEC was in fact insolvent at the time of the payments, nor was it necessary to consider whether the payments were fraudulent preferences.


The takeaway from the Pikani decision is this: when making a determination regarding whether certain dealings between parties occurred at arm's length, one needs to look at the totality of the circumstances, using the criteria from McClarty and the jurisprudence under the ITA as a guide. An arm's length determination is central to determining whether payments made were fraudulent preferences under the BIA, and it is not always the case that directors are not at arm's length with the corporations they serve. Intent to grant a preference is no longer a requirement under the BIA.

An Associate here at Davis LLP, Ms. Karen Fellowes, acted on behalf of 607 in this matter.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.